Covestor

Why we own W.W. Grainger and Abbott Labs

Donald Jowdy — Wed, 22 Feb 2012 10:20:16 +0000

Author: Donald Jowdy, Suncoast Equity

Disclosure: Long ABT, GWW, NKE

This past year was one of measured progress that included strong corporate profits, low US economic growth, marginal improvement in employment, and an uptick in housing starts coupled with less price declines. Financial stress was also present from the Euro-Zone on the brink of collaborative collapse, U.S. debt ceiling crisis, and one of the worst displays in a long, long time of ineffective government.

The equity market swung wildly but ended up in just about the same place it started the year. The Suncoast Equity model (SEM) fared a bit better posting a positive return of 4.3% net of fees versus the S&P 500 of +2.1%, and SEM outperformed most of its peers as represented by the Lipper Core/Growth reporting returns of 0% and -3%, respectively.

Looking forward we see many reasons to stay the course. We continue to emphasize the best opportunities will be in high quality businesses with a global reach and strong balance sheets. Company valuations are attractive based on both an absolute basis and relative to bonds, especially against high quality corporates and Treasuries.

Earnings growth projections for our portfolio in 2012 are in the low double digits, down slightly from the mid teens growth we suspect 2011 will post. But these are still at healthy levels and higher than the mid-single digit profit growth for the companies as a whole in the Standard & Poor’s 500. Anemic portfolio appreciation in 2011, combined with strong earnings growth in 2011 and 2012, may support rising portfolio price appreciation in the year ahead.

We have always felt that our favorable long-term investment results benefit from selection among higher quality businesses, as well as from our intense emphasis on safety. High quality businesses boast business statistics, such as above average return on capital and excess free cash flow. A rather large percentage of publicly traded businesses don’t make the cut and this narrows our focus to approximately 250 companies.

Safety has been a critical factor and will always be as long as we are managing client assets. In today’s world of extreme volatility and a lot of leverage, some companies’ financials may implode, and we don’t want to be invested anywhere near these situations. A company with substantial cash or little to no debt is not going to go bankrupt. So the SEM Disciplined Investment System (SEM-DIS) requires companies to have strong balance sheets.

Within our portfolio it may appear as if we favor some industries, such as consumer goods, but our choices are entirely bottom-up. It just so happens that a disproportionate number of consumer-based companies are very good choices because they boast global brands, recurring sales, good growth prospects and lower risk; the attributes of an attractive business. Nike (NKE) fits this description and we have been owners for nearly five years.

When we review the investment potential of any company in our universe we conclude that there are three ways to succeed, or that we can benefit by: (1) The growth in intrinsic earnings value and an increase in the business valuation; (2) The growth in intrinsic earnings but business valuation remains constant and (3) Flat intrinsic earnings growth but the valuation improves. The first path is the best and is primary in nearly every new portfolio holding.

Our foremost belief is that over time stock price follows earnings growth. Below are the earnings per share progress and average stock price for W.W. Grainger, (GWW), over the last decade, a SEM portfolio holding for nearly six years:

Year Earnings Per Share Stock Price (Avg. Hi/Low)

2000 $1.86 $40.60

2005 $3.68 $62.00

2011e $9.00 $158.77

So what is your first observation other than SEM should have become an investor earlier on? Rising earnings result in higher valuations and good investment returns. Deeper analysis would also reveal that earnings growth at GWW is generated by modest amounts of incremental capital. If you own a business in which the earnings grow, but that is only achieved alongside management continuing to raise capital by selling new shares in the company or borrowing more money, this will not work out well for early or later owners. This is why we seek companies that earn consistently high returns on capital and avoid companies whose returns on capital trends are at low levels or declining.

The next component is business valuation. Oftentimes the stock market is driven in the near to mid-term by fear, greed and other raw emotions, which we have today. This volatility will create a significant gap between a company’s current stock price and its intrinsic value. Since we always seek the opportunity to buy high quality companies at a discount, let us go through an example. We usually focus our attention on detailed valuation yardsticks such as free cash flow yields, but for this example we will stick with the more familiar price-to-earnings ratio (P/E). We look at this from three perspectives by comparing the current P/E ratio to (1) the company’s own history under a similar growth environment, (2) other companies we can own or the market benchmark, and (3) other investments such as fixed income. We will utilize SEM holding Abbott Labs (ABT), which we have owned since 2008, to illustrate this business valuation concept:

Abbott Labs - Earnings Growth, Price to Earnings Ratio

Current Year: 8.2%, 11.1

10-year average: 9.0%, 18.2

S&P 500, current p/e: 6.0%, 12.3

AA 10 Year Corporate Bond Yield: 3.5%, 28.5

From the above table our first focal point is that (ABT) has grown its earnings at an average annual rate of 9% over the last ten years and it is projected to grow earnings at a similar rate of 8.2% in 2012. Over that same ten year time period ABT's stock has sold at an average P/E ratio of 18.2x, but today it is selling at only 11.1x, a considerable discount to its ten year historical average. ABT is also currently selling at a P/E ratio that is slightly below the market and our analysis concludes that it is an above average company. ABT, with an earnings yield (the reciprocal of its P/E ratio) at 9%, is a much better value than the AA 10 year bond, which pays only 3.5%. So for every $1 we invest today we earn 9 cents on our ABT investment versus 3.5 cents for the AA 10 year. All three measures support ABT as an attractive investment.

Of course, our work is not complete by simply looking at the quantitative side of the equation. We put much work and importance into analyzing the qualitative attributes of the company and its business advantages.

Our remarks last quarter proposed that “change is gonna happen” and evidence keeps building toward that path. Along the journey we can’t help but poke fun at the US government buffoonery. Following on the heels of the debt-ceiling debacle in August, the “Super Committee” got nothing accomplished. We closed the year with the drama of the two-month extension of a payroll-tax break. Should decisions involving a two-month extension be celebrated? News reports revealed that the basis for approval was that the Republicans feared the party would suffer in the 2012 elections if the tax break was not approved. Sounds like a solid business decision to me. These politicians have created a global embarrassment and it goes without saying that leadership is sorely lacking throughout Washington. Of course this can’t continue and at some point we need solid leadership or we have to engage Warren Buffett’s sage advice: ”You just pass a law that says that any time there’s a deficit of more than three percent of GDP, all sitting members of Congress are ineligible for re-election.”

Amidst the folly in governmental leadership and financial stress amid domestic and European sovereign nations, the world is becoming a better place. Bloomberg Businessweek Deputy Editor Romesh Ratnesar summed it up quite nicely: “Since 1981 the proportion of the developing world living in extreme poverty has fallen from 50% to less than 20%...infant mortality is down across the board...the chances of dying in war have never been lower… the 7 billionth person was born into a world that’s richer, healthier and safer than at any time in history.”

As our economy chugs toward recovery, good news slowly surfaces such as recent reports that Americans are filing fewer new claims for jobless benefits than at any time since the recession and new housing starts are kicking up. Our companies grow in the U.S. and in the global economy simply because people living longer consume more.

Our portfolio is attractively priced and equities in general are relatively good values precisely because of the uncertainty throughout various economic landscapes and political charades. When you review history, rarely are the best opportunities connected to cheerful times. The general worries give us the chance to purchase good quality companies at a discount.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Well-priced stocks will ride out these market swings

Dan Plettner — Tue, 21 Feb 2012 08:37:42 +0000

Author: Dan Plettner

Covestor models: Pure Short Opportunistic, MLP Direct Ownership, Taxable Income, Well-Intentioned Activism, Long/Short Opportunistic, Core

Is it time for the market to step back and digest the recent ascent, or time for investors to step up and realize the balance of risks remains skewed to the upside?

As I discussed last month, 2011 had a frustrating feel. The volatility and tendency for managers to be challenged in outperforming indices was noteworthy even in the presence of extraordinarily attractive valuations.

In 2012, the market has rewarded some already, and bewildered others. Those who have eschewed all but Treasuries and dividend growth stalwarts have significantly underperformed the rally.

There is a lesson: price matters. When securities are priced well, they tend to outperform for some period. But “when” tends to be the market’s painful tease. What we have been seeing is usually what the masses focus on in making investment decisions, rather than what logic objectively suggests should occur. Essentially, the masses are constantly focused on the rear-view mirror.

I feel great about my January, but more importantly about what I own. After all, whether the most recent move was up or down really has minimal relevance to what is priced well today and what objectively could be expected of future periods. The question to ask, I think, is “If I were a ground squirrel just awakened from hibernation, would I like valuations today?”

It’s a critical question for me because my thesis on the SunAmerica closed-end funds recently came to fruition (I’ve liquidated the now open-ended funds in my Well-Intentioned Activism model) leaving me capital to invest. I would today like valuations as a post-hibernation squirrel. The tremendous equity returns I expected for a 10 year period starting in January have scarcely started. The challenge is being a disciplined buyer in particular investment theses.

Notice in my analogy, I’m a ground squirrel. I’m most certainly not a bear and haven’t been bearish for a long time. Still, my objective expectations are always tempered by modesty, evident in my choice to blend my various styles.

This market rally may have some legs

Jesse Barkasy — Tue, 21 Feb 2012 05:38:32 +0000

Author: Jesse Barkasy

Covestor model: Trend Following
The major stock market indices have had a good run in January and many stocks are breaking out to new 52-week highs. Our Trend Following model now seeks to find if there are any clear leaders to invest in while being cautious about a return to a choppy market.

We have tested a few breakouts and they certainly are holding much better than they were in the past few months. This may indicate institutions are buying and holding. This U.S. market is in rally mode and that makes sense, given the slim choice of investments in the world today. The many large natural gas discoveries in North America is also very welcome news in my view. This puts our electrical grid economy on a solid foundation for many years to come.

Should there be a group of investments that are making the economy more efficient or productive, they will certainly show themselves if we are entering a new bull market phase. The trend is up and there are many stocks that are extended beyond a reasonable buy risk point as well. We may need a correction to be able to enter some trades at better levels and so the Trend Following model will be patient when looking for longer term investments lasting more than a few days and weeks.

At the same time the model seeks out buying opportunities in this market, we will also look for sectors that are breaking down just in case the Europe factor or budgetary issues in the United States resurface. The markets have come a long way in just a few months. This is encouraging and also makes us brace for a potential correction.

Massive global liquidity creates big opportunity for stocks in 2012

Gerald Gehman — Mon, 20 Feb 2012 13:03:51 +0000

Covestor manager Gerald Gehman recently shared with us his outlook on the market through the rest of this year:

Gehman Capital's Covestor model is Undervalued Growth Companies.

Here's a transcript of Gerald's remarks:

We're going to have a very exciting year in 2012 in the stock market. The central banks around the world have just plied everybody with money, whether it's banks, insurance companies. They've done everything they can to make sure that we don't have a liquidity problem throughout the world.

We started in the U.S., now you're seeing the European central banks doing it, not just the ECB - all the banks. And in China
now you're seeing rates come down and they're making money available in China so it's a real opportunity.

You do have to be careful what you do - it is going to be very volatile - but if you if you study and you look closely at these companies there's a real opportunity ahead.

Gold will continue to rise and U.S. stocks remain cheap

Tom Yorke — Sun, 19 Feb 2012 11:43:14 +0000

We recently had a chance to ask Tom Yorke of Oceanic Capital where he sees markets headed through the rest of 2012. Tom's brief response:

Here are details on the three Oceanic Capital models on Covestor: Global Diversified Conservative, Global Diversified Moderate and Global Diversified Aggressive.

A transcript of Tom's remarks:

Briefly, for 2012 I see some changes coming afoot.

First of all I think gold is going to figure significantly more this year than last and continue its eleven year uptrend.

I think U.S. equities are probably the cheapest equities out there. I'm still very nervous on international equities because I don't think their problems are quite solved and I think the international crisis is going to cause the emerging market equities to kind of lag as well.

So at this stage I'm very bullish on gold, I'm most bullish on U.S. equities and I think commodities are going to be a quasi-play - that is, you probably need to have some, but it's probably not going to be the best performing asset class this year.

Expect a big stock rally and bonds to fall throughout 2012

Robert Gay — Sun, 19 Feb 2012 08:10:08 +0000

We recently had a chance to ask Covestor manager Bob Gay, head of Global Equity Analytics and Research Services LLC (GEARS), how he sees the rest of 2012 playing out for markets:

Bob's three Covestor models are Earnings Surprise, Luxury Liner and Speedboat.

A transcript of Bob's remarks:

We're looking now at the prospect of a major acceleration in the performance of the stock market through the year 2012 and it's probably one of the most important opportunities for investors to buy stocks that we've seen over our investing lifetimes.

Bond yields are now unusually low - in fact, long treasury bonds are at unprecedented lows - so the likelihood of bond yields declining from here is slim and in fact given a very broad acceleration in corporate profitability that's now underway, it's much more likely that bond yields will rise.

Generally speaking rising bond yields is an impairment of equity performance but with corporation profitability rising as quickly as it is, it's much more likely that stocks will outperform bonds.

In fact it's my proposition that by the end of 2012, stocks will be twenty percent higher - which will be a great year - but more importantly that bonds will be twenty percent lower, which will make the year 2012 one of the most dramatic outperformance periods of equities relative to bonds that we've seen in our investing experience.

Investing in the age of the frugal American

Charles Sizemore — Sun, 19 Feb 2012 07:45:42 +0000

Author: Charles Sizemore

Covestor models: Sizemore Investment Letter and Tactical ETF, Strategic Growth Allocation

The February 13 issue of Barron's made a statement that caught my eye: Americans are paying down their mortgages.

Fifty percent of all refinancings now result in smaller loans than the previous mortgage. Rather than using their homes as a virtual ATM machine, extracting equity (if you have any) to meet current expenses, Americans are actually retiring their mortgage debt early. It's a remarkable change in behavior for a nation of consumers who, just a few short years ago, had a well-deserved reputation for wanton frivolity in their personal finances.

As Barron's pointed out, paying down your mortgage at, say, 4% can be considered an "investment" when bonds yield barely 2%. But more than this, it is a change in sentiment brought about by changing demographics. America's baby boomers, the largest and richest generation in history, are entering a new phase of their lives. With retirement approaching fast, the boomers are adopting the fiscal habits their parents were known for. (We all eventually become our parents, it just took the boomers a little longer than past generations.)

The boomers are the engine that has driven the U.S. economy (and by proxy, the world economy) over the past 30 years, and their reticence to spend will have a real impact on economic growth.

What does this mean for investors? Surprisingly, the news isn't all bad.

True enough, top-line revenue growth for companies that depend heavily on the American market will almost certainly be modest in the decade ahead. Earnings per share growth, when it happens, will likely have to come from share-count reductions through stock buybacks and from revenue growth in emerging markets.

The good news is that investors can still make a decent profit under these conditions, assuming they choose investments wisely and pay a reasonable price. With less need to expand their businesses, many American companies are finding themselves with unprecedented levels of cash on hand. Some—such as notorious tightwad Apple (AAPL) —are simply stockpiling the cash (Apple 's cash balance is an astonishing $97.6 billion).

But others, including Apple's rival Microsoft (MSFT) are using their excess cash to reward their shareholders with share buybacks and, even better, dividends. Microsoft raised its dividend by a full 25% last year, and more increases are expected in 2012.

A better example might be that of “sin stocks." Unlike Apple and Microsoft, which still have robust and growing demand for their products, American tobacco firms have faced slowing demand for their products for decades. But with no need to spend cash on investment and no need to advertise, tobacco stocks have still proven to be fantastic investments, in large part due to their rock-solid dividends.

I consider dividends to be the key to profitable investing in the years ahead. There will be periods when speculative growth stocks are more attractive, and we happen to be in one this quarter (see "Sin Stocks Trail Their More Virtuous Peers " as an example). But for the core of your portfolio, stable, dividend-paying stocks are an attractive option in a world of slow growth and extremely low bond yields.

Buying cheap stocks on this market rally

Mark Holder — Sun, 19 Feb 2012 07:31:03 +0000

Author: Mark Holder, Stone Fox Capital

Covestor model: Opportunistic Arbitrage

After a difficult performance in 2011, the model delivered a 25% gain in January easily outperforming the 4.4% advance for the S&P500. We spent most of the month accumulating cheap stocks in order to take advantage of the market rallying against the proverbial 'wall of worry'.

January was an interesting month with stocks rising even in the face of what appeared like continued negative news out of Europe. With the continued focus on Greece, most investors stayed out of the stock market and missed that yields on Italian and Spanish bonds saw dramatic declines. The ability to isolate the problems to Greece and Portugal were a big relief to markets that had priced in a European blowup in December.
The decline in emerging markets inflation was also a big plus. Specifically fast growing countries like China and India saw multi- year lows in inflation rates allowing monetary policy to pause and potentially ease as 2012 progresses.

The stock prices of crane manufacturers Terex (TEX) and Manitowoc (MTW) saw massive gains in January, thanks to signs of increasing construction demand in the US and the potential for continued strong growth in emerging economies. The most impressive improvement came from ChinaCache (CCIH), gaining nearly 75% as it moved from $4 to $7. Unfortunately it was a very small portion of the portfolio at that point so the contribution to model gains for the month were slight.

Other big gainers were Sears Holdings (SHLD) and SodaStream (SODA). The Sears share advance reflected a bounce back from sharp declines in the last couple months of 2011 when Chairman Eddie Lampert bought $150 million-plus in shares. On the other hand, SodaStream rebounded from a long 5-month consolidation period. A bullish holiday season for the home beverage maker may indicate the company is positioned for a big run in 2012.

Hard to imagine that a portfolio that jumped 25% in one month could have losers, but this one managed to have three stocks with more than a minimal loss. The main culprit was the drop in natural gas prices to 10-year lows. While the model attempted to focus on stocks benefiting from the high price of oil or coal, stocks with natural gas exposure were hit during the month.

The biggest loser was C&J Energy Services (CJES). The stock was down over 20% even though the hydraulic fracturing company is focused mostly on oil plays. In fact, C&J confirmed in early February that all of its fracking fleets were now working on oil plays. Due to it's depressed stock price and huge earnings potential, C&J remains one of our top picks for the rest of 2012.

Carrizo Oil & Gas (CRZO) also had a bad month as the natural gas price declines impacted it. However, the company exited 2011 with more than 50% of its revenue coming from oil projects specifically in the Eagle Ford. The oil percentage will probably rise to 60-70% in a short time if natural gas remains this low. Currently, Carrizo is obtaining prices of NYMEX plus $9 for that oil.

The other major loser for the month was Monster Worldwide (MWW) dropping roughly 10% after a disappointing earnings report for fourth quarter of 2011. The company actually had sizable gains heading into month end, but it dropped over 20% after the weak guidance for 2012.

All of the trades in January were purchases as the model levered up with the rising tide. Foster Wheeler (FWLT) was added in a couple of purchases around $20. The stock was added back after dumping it towards the end of 2011. Foster Wheeler will benefit from a rebounding global need for construction of energy projects. Gafisa (GFA) was also added back to the model after dropping it in 2011.

The only new stock was OCZ Technology (OCZ). This leading provider of solid state drives (SSDs) saw exceptionally fast growth last year and expects to continue growing at a fast clip in 2012. With the tech stock valued at only 1x sales, the stock was too cheap to ignore.

Existing positions were increased in Lincoln Financial (LNC), Monster Worldwide, and Savient Pharmaceuticals (SVNT) as the stocks appeared ready to rebound from 2011 lows.

The year got off to a solid start with more gains expected. The potential even exists for a market breakout to challenge 2007 highs. Clearly risks remain and investors have to remain diligent to manage risks.

For now, this model remains levered and ready to take advantage of fund flows out of bonds and dividend paying stocks into growth and emerging market stocks.

I believe we'll see recovery, not recession

Gerald Gehman — Sun, 19 Feb 2012 07:14:04 +0000

Author: Gehman Capital

Covestor model: Undervalued Growth Companies

Gehman Capital’s Undervalued Growth Companies model is a small cap portfolio that is designed to maximize rates of return over an extended period of time. I do not market time to avoid losses, or take profits in the short term. I choose to invest in companies that I think have a product, or products, that will generate long term profits and have the financial resources to withstand the stresses of start-up companies. For all of 2011, the account was down 41.4%. In 2012, the account is up 17.8% as of early February.

I believe that certain US equities are underpriced and, more broadly, there is a lot of money currently available for investment in the global economy and markets.

Most every central bank in the world in trying to force money into the world economy. The money has allowed the US to avoid an extreme disaster, and will continue to stimulate a recovery – it may be slow – but I believe it will be a recovery – not a recession.

Now that the US is starting to recover, it is the European debt crisis that is pressuring stock prices. I believe that Europe will also avoid a serious meltdown and will eventually rebuild their economies.

We know it is political and social differences that is causing Europe so much trouble in defining a solution. There is a strong consensus building now, however, that if there is a large enough fund to “ring-fence” the problem countries that the extreme pressure and discussion of defaults will be eliminated. When this happens, each country can go about repairing their structural problems and will eventually be provided with stimulus money to help them grow out of their financial stress.

The solution resides with Germany, which has the capital and the will to create a fund to “ring-fence” the problem countries. But – they are not going to do that until they are convinced that controls are in place to be sure that the weak countries will not – again – throw money at the “dark hole” of a welfare state that cannot sustain itself.

Once Germany makes the money available – their ability to determine how the money is spent must be pre-defined. If they just make the money available – it will be wasted. Germany is waiting for a European structure that can sustain itself.

Germany, however, has almost no choice – it must stabilize the European Community and the Euro for their international trade. Germany’s economy is strong because of their exports. Their exports are strong because the Euro is cheap – the Euro is cheap because the weaker countries cause it to be cheap. If Germany had to trade on the Deutschmark – or some other German currency – their exports would be expensive and they would be suffering like the rest of Europe.

Therefore, I believe that Germany will use their resources to stabilize the European Community – but only when they are convinced their money will not be going down the “black hole.”

What does this mean for stock prices? Investing is a process of analyzing risk and reward. I think the US stock market is assuming that there is a 50% chance that Europe will drag the US economy down. I think there is only a 20% chance of this. Even if it takes a long time for the European Community to recover, the US economy is much more dependent on China and other emerging countries. Therefore, I think it could be extremely expensive to be entirely in cash – as many investors are.

In the worst European case, I think US stocks could drop in the area of 20%. Therefore, I suggest that investors invest the percent of their portfolio that can withstand a 20% drop. Note, now, that I think the odds are very high that the stock market will move on to greater heights. If Europe has a problem, the market could easily have a significant drop, but over a reasonable time period, I think the market will recover.

That is because the US economy is not dependent on Europe – it is dependent on the domestic economy – which is being flooded with cash from the Federal Reserve Board – and the emerging markets – which are being driven by the growth of the new middle class.

Obviously there are risks in the economy, but I think the risk-reward favors putting some money in the market.

Extreme amounts of capital are available around the world Germany needs the Euro to maintain their strong economy Germany has the capital to seed a fund that will “ring-fence” the problem European Countries.

The European Community will recover over time, and I believe there is a high probability that stocks will trade much higher over time.

Using technical points to aid portfolio decisions

Bill DeShurko — Sun, 19 Feb 2012 06:55:20 +0000

Author: Bill DeShurko, 401 Advisor

Covestor model: Dividend and Income Plus

Disclosure: Long PSP

One mistake many investors make is to view their portfolio in a vacuum. While many strategies are designed to minimize market influences, the truth is that the markets have become extraordinarily correlated since the financial crisis. So when reviewing performance and strategy for my Dividend and Income Plus portfolio, I always look at what is happening to the overall market.

Below is a chart of the SPDR S&P 500 ETF Trust (SPY) The horizontal white lines show the trading range the market was in for the first half of 2011. After the summer 2011 selloff and subsequent rally, the market re-entered the trading range around the first of this year. It was clear at that point that regardless of where the market went, the media would make the next move out to be the beginning of either the next great bull market, or the return of the secular bear.

Either way the market went, it was fairly meaningless as far as predicting the longer-term trend. Instead, having entered back into an established trading range, the markets were more likely to test the range's resistance around 136 and support around 128. Any bouncing around between these levels would just be the market consolidating its rally, prior to the next move.

What would be important would be any breakout above or below these levels.

Sticking with this thesis, I decided to review account holdings over the last couple weeks as the market continued its climb toward that upper resistance level. If I'm right, the market should head lower, toward support, for the rest of February.

First, a word on my "predictions." One thing that continually surprises me is how poorly most people understand the concept of probabilities. A probability is an indication of something that might happen. That is very different from a certainty. However, if we can assign some type of weighting to probabilities they can become very valuable - ask a Vegas sports bookie about spreads and odds.

In this case, there is no certainty that the market is in the process of peaking (temporarily?), but it is a common occurrence, and we have some pretty strong areas of support and resistance that were established over a six-month period in 2011. My point is, I'm not betting the ranch here, and I'm certainly not going to make any extreme bets with client money. But after a nice run this year, and a really nice run from last year's market bottom, it is a good time to review holdings and see if our portfolios can benefit from some upgrading. The charts just help with timing the trade.

For my Covestor portfolio I decided it was time to cut ties with MV Oil Trust (MVO). While I like its dividend, I get worried about laggards during market rallies.

I also chose to sell another holding, Prospect Capital (PSEC). While PSEC has performed well and pays a very nice dividend, I decided that I felt more comfortable holding PowerShares' Global Private Equity ETF (PSP) . Longer term, PSEC and PSP have similar returns, but with the market potentially getting a little stretched, I like the diversity of the ETF vs. an individual holding. (More on the "buy" side in a later post.)

When I looked at the chart for SPY above, I decided I would do the sells, but hold off on the subsequent buys. If I'm right and the market consolidates and heads down to its prior resistance level, I will have made a good choice and can buy my new holdings at a better price. If I'm wrong, all I give up is a little upside as the market breaks through resistance. If the fundamentals are strong, I can look to buy around the 138 level. If the market breaks out to the upside and I don't get back in until later, I could be giving up some potential gain. But I also have raised extra cash for my portfolio if the market drops to the support level around 128.

Overall, I am still bullish and would prefer being 100% long. But when planning portfolio changes, it can make sense to observe the overall market, make your assumptions, and act accordingly. In this case I just can't see making a buy decision when it looks to me like we are approaching a pretty strong resistance level. And fundamentally - with falling corporate earnings and continued troubles in Europe - I see far more compelling the arguments for the market to temporarily pause than for it to power through to new highs.